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Essays on international trade and foreign direct investment

Abstract

This dissertation comprises three separate essays on international trade and foreign direct investment. We present the gravity model with Poisson pseudo-maximum likelihood (PPML) estimation to investigate the effect of transportation costs on trade, the effect of RTAs on intra- and extra-regional trade in developing RTAs and the role of institutions on FDI in ASEAN. The second chapter is a review of the log of gravity model and econometric specification. PPML approach applied to the gravity model is initially suggested Silva and Tenreyro (2006). They have shown that the log-normal gravity equation suffers from three problems: the bias created by the logarithmic transformation, the failure of the homoscedasticity assumption, and the way zero values are treated. They show that the proposed PPML estimation technique being capable of solve those problems. In the first essay, we study the effect of new measures of transport performance on international trade among 15 counties in southern and eastern Africa and on the international trade of those countries with six other regions in the world. The results indicate that a 10 percent reduction in transport costs increase trade volumes by about 10 percent. We also find that coefficients for each of seven transport performance do not differ significantly across years. Our results indicate that intra-regional trade of the SEA countries has higher sensitivity to distance and to transport performance than the worldwide trade of those countries. In addition there is no indication that the trade of landlocked SEA countries has higher sensitivity to the transport performance than the trade of coastal SEA countries. In our second essay, we investigate the effects of RTAs on world and regional trade patterns, concentrating on data for the 12 RTAs covering 1981-2008. The effects of RTAs are captured by dummies that reflect intra-bloc trade and import extra-bloc trade and export extra-bloc trade separately. We find considerable variation in the trade effects associated with different arrangements. Also our finding indicates that the result for pooled regression and the result for individual regressions are different. In the third essay, we investigate the impact of institutional 'quality' on bilateral FDI in ASEAN covering 1995 - 2005. We found that security of transactions and contracts and the quality of public governance have a strong relation to increase FDI inflow in ASEAN countries.